Here is what is wrong with McCain’s new housing proposal: It can’t improve on current law without rewarding an unacceptable amount of bad behavior.
Under the Frank-Dodd housing bill that was signed into law last summer, borrowers qualify for a federally subsidized workout only if they meet the following criteria:
1) The borrower must live in his house — no investment properties.
2) The borrower must show that he has been spending at least a third of his income on mortgage payments since March of this year.
3) He must also show that he can afford to make lower payments if his lender agrees to a write-down.
This is obviously a narrow slice of borrowers — around 400,000, according to most estimates. It excludes people who borrowed to buy investment properties in order to flip them for a profit. It excludes people who are hopelessly in over their heads and simply cannot afford the homes they’re in. And it excludes people who could afford to pay their mortgages if they wanted to but have instead decided to mail the keys to the bank rather than continue making payments on a house that is worth less today than when they bought it.
McCain’s campaign says his plan would help “millions” of borrowers stay in their homes without authorizing any new spending. But he has not said how he plans to accomplish this without lowering the standards set forth in the Frank-Dodd bill. And if he does lower the standards — by, for example, letting people who can afford their current payments get a write-down just because their property value has fallen — then he would be offering taxpayer assistance to “ruthless borrowers,” which is an industry term for borrowers who default on their obligations not because they can’t pay but because they’ve decided it’s not in their interest to pay.